us-tx/regs
34 Tex. Admin. Code § 3.587 — Margin: Total Revenue
(a)
Effective date. The provisions of this section apply to franchise tax reports originally due on or after January 1, 2008, except as otherwise noted.
(b)
Definitions. The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise.
(1) Actual cost of uncompensated care--The amount determined by multiplying Operating Expenses by the Uncompensated Care Ratio where:
(A) operating expenses are the amounts reported on line 2 (cost of goods sold) and line 21 (total deductions), Internal Revenue Service Form 1065; the amounts reported on line 2 (cost of goods sold) and line 20 (total deductions), Internal Revenue Service Form 1120S; or the corresponding line items from any other federal form filed, less any items that have already been subtracted from total revenue (e.g., bad debts);
(B) uncompensated care ratio means uncompensated care charges less partial payments divided by total charges;
(C) uncompensated care charges are the charges for health care services where the provider has not received any payment or where the provider has received partial payment that does not cover the cost of the health care provided to the patient. Uncompensated care charges do not include any portion of a charge that the health care provider has no right to collect under a private health care plan, under an agreement with an individual for a specific amount, or under the charge limitations imposed by the programs described in subsection (e)(10)(A)(i) - (iii) of this section;
(D) charges must be comparable to the charges applied to services provided to all patients of the health care provider;
(E) partial payment is an amount that has been received toward uncompensated care charges that does not cover the cost of the services provided;
(F) total charges are charges for all health care services, including uncompensated care;
(G) records that clearly identify each patient, the procedure performed, and the charge for such a service, as well as payments received from each patient must be maintained by the health care provider for all uncompensated care;
(H) a corresponding adjustment must be made to reduce the cost of goods sold deduction calculated under §3.588 of this title (relating to Margin: Cost of Goods Sold) or the compensation deduction calculated under §3.589 of this title (relating to Margin: Compensation) for the portion of the cost of goods sold or compensation that has been excluded from total revenue.
(i) For a single taxable entity,
(I) the cost of goods sold adjustment is equal to the cost of goods sold deduction multiplied by the uncompensated care ratio; and
(II) the compensation adjustment is equal to the compensation deduction multiplied by the uncompensated care ratio.
(ii) For a combined group,
(I) the cost of goods sold adjustment, as described in clause (i)(I) of this subparagraph, is only calculated for and applied to the costs of goods sold deduction for each member of the combined group claiming the exclusion from total revenue for the actual cost of uncompensated care; and
(II) the compensation adjustment, as described in clause (i)(II) of this subparagraph, is only calculated for and applied to the compensation deduction for each member of the combined group claiming the exclusion from total revenue for the actual cost of uncompensated care.
(III) If an employee is paid by more than one member of a combined group, the compensation adjustment calculated in subclause (II) of this clause is subject to reduction based on the combined group's limitation on wages and cash compensation under §3.589(c)(1) of this title. The compensation adjustment for a member is reduced by the member's pro-rata share of the employee's wages and cash compensation that exceeds the combined group's wages and cash compensation limitation, multiplied by the uncompensated care ratio.
(2) Federal obligations--
(A) stocks and other direct obligations of, and obligations unconditionally guaranteed by, the United States government and United States government agencies; and
(B) direct obligations of a United States government-sponsored agency.
(3) Health care institution--An ambulatory surgical center; an assisted living facility licensed under Health and Safety Code, Chapter 247 (Assisted Living Facilities); an emergency medical services provider; a home and community support services agency; a hospice; a hospital; a hospital system; an intermediate care facility for individuals with an intellectual disability or a home and community-based services waiver program for persons with intellectual disabilities adopted in accordance with the federal Social Security Act, §1915(c) (42 U.S.C. §1396n) (Compliance with State plan and payment); a birthing center; a nursing home; an end stage renal disease facility licensed under Health and Safety Code, §251.011 (License Required); or a pharmacy.
(4) Health care provider--Any taxable entity that participates in the Medicaid program, Medicare program, Children's Health Insurance Program (CHIP), state workers' compensation program, or TRICARE military health system as a provider of health care services.
(5) Internal Revenue Code--The Internal Revenue Code of 1986 in effect for the federal tax year beginning on January 1, 2007, not including any changes made by federal law after that date, and any regulations adopted under that code applicable to that period.
(6) Landman services--
(A) performing title searches for the purpose of determining ownership of or curing title defects related to oil, gas, other energy sources, or other related mineral or petroleum interests;
(B) negotiating the acquisition or divestiture of mineral rights for the purposes of the exploration, development, or production of oil, gas, other energy sources, or other related mineral or petroleum interests; or
(C) negotiating or managing the negotiation of contracts or other agreements related to the ownership of mineral interests for the exploration, exploitation, disposition, development, or production of oil, gas, other energy sources, or other related mineral or petroleum interests.
(7) Lending institution--An entity that makes loans; and
(A) is regulated by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Office of Thrift Supervision, the Texas Department of Banking, the Office of Consumer Credit Commissioner, the Credit Union Department, or any comparable regulatory body;
(B) is licensed by, registered with, or otherwise regulated by the Department of Savings and Mortgage Lending;
(C) is a "broker" or "dealer" as defined by the Securities Exchange Act of 1934 at 15 U.S.C. §78c (Definitions and application); or
(D) provides financing to unrelated parties solely for agricultural production.
(8) Management company--A corporation, limited liability company, or other limited liability entity that conducts all or part of the active trade or business of another entity ("the managed entity") in exchange for a management fee and reimbursement of specified costs incurred in the conduct of the active trade or business of the managed entity, including wages and cash compensation as determined under Tax Code, §171.1013(a) and (b) (Determination of Compensation). To qualify as a management company:
(A) the entity must perform active and substantial management and operational functions, control and direct the daily operations and provide services such as accounting, general administration, legal, financial or similar services; or
(B) if the entity does not conduct all of the active trade or business of an entity, the entity must conduct all operations, as provided in subparagraph (A) of this paragraph, for a distinct revenue-producing component of the entity.
(9) Net distributive income--The net amount of income, gain, deduction, or loss relating to a pass-through entity or disregarded entity reportable to the owners for the tax year of the entity.
(10) Obligation--Any bond, debenture, security, mortgage-backed security, pass-through certificate, or other evidence of indebtedness of the issuing entity. The term does not include a deposit, a repurchase agreement, a loan, a lease, a participation in a loan or pool of loans, a loan collateralized by an obligation of a United States government agency, or a loan guaranteed by a United States government agency.
(11) Pro bono services--The direct provision of legal services to the poor, without an expectation of compensation.
(12) Professional employer organization--A business entity that offers professional employer services or temporary employment services. For the purposes of this paragraph:
(A) "Professional employer services" means the services provided through coemployment relationships in which all or a majority of the employees providing services to a client or to a division or work unit of a client are covered employees. "Professional employer services" does not include temporary help, an independent contractor, the provision of services that otherwise meet the definition of professional employer services by one person solely to other persons who are related to the service provider by common ownership, or a temporary common worker employer.
(B) "Temporary employment services" means a person who employs individuals for the purpose of assigning those individuals to the clients of the service to support or supplement the client's workforce in a special work situation, including an employee absence, a temporary skill shortage, a seasonal workload, or a special assignment or project.
(13) Qualified courier and logistics company--A taxable entity that:
(A) receives at least 80% of the taxable entity's annual total revenue from its entire business from a combination of at least two of the following courier and logistics services:
(i) expedited same-day delivery of an envelope, package, parcel, roll of architectural drawings, box or pallet. "Same-day delivery" means the service provider must pick up and deliver an item on the same calendar day;
(ii) temporary storage and delivery of the property of another entity, including an envelope, package, parcel, roll of architectural drawings, box, or pallet; and
(iii) brokerage of same-day or expedited courier and logistics services to be completed by a person or entity under a contract that includes a contractual obligation by the taxable entity to make payments to the person or entity for those services;
(B) during the period on which margin is based, is registered as a motor carrier under Transportation Code, Chapter 643 (Motor Carrier Registration), and if the taxable entity operates on an interstate basis, is registered as a motor carrier or broker under the motor vehicle registration system established under 49 U.S.C. §14504a (Unified Carrier Registration System plan and agreement) or a similar federal registration program that replaces that system, during that period;
(C) maintains an automobile liability insurance policy covering individuals operating vehicles owned, hired, or otherwise used in the taxable entity's business, with a combined single limit for each occurrence of at least $1 million;
(D) maintains at least $25,000 of cargo insurance;
(E) maintains a permanent nonresidential office from which the courier and logistics services are provided or arranged;
(F) has at least five full-time employees during the period on which margin is based;
(G) is not doing business as a livery service, floral delivery service, motor coach service, taxicab service, building supply delivery service, water supply service, fuel or energy supply service, restaurant supply service, commercial moving and storage company, or overnight delivery service; and
(H) is not delivering items that the taxable entity or an affiliated entity sold.
(14) Qualified destination management company--A taxable entity that:
(A) is incorporated or is a limited liability company;
(B) receives at least 80% of the entity's annual total revenue from providing or arranging for the provision of a combination of at least six destination management services. "Destination management services" means transportation vehicle management; booking and managing entertainers; coordination of tours or recreational activities; meeting, conference, or event registration; meeting, conference, transportation, or event staffing; event management; meal coordination; shuttle system services, including vehicle staging, radio communications, signage, and routing services; and airport meet-and-greet services, including the provision of airport permits, manifest management services, porterage, and passenger greeting services;
(C) maintains a permanent nonresidential office from which the destination management services are provided or arranged;
(D) has at least three full-time employees;
(E) maintains a general liability insurance policy with a limit of at least $1 million;
(F) during the preceding tax year, had at least 80% of the entity's client contracts for:
(i) clients from outside Texas who were determined by a contracting entity outside this state; or
(ii) clients from outside this state who were program attendees staying in a hotel in this state;
(G) other than office equipment used in the conduct of the entity's business, does not own equipment used to directly provide destination management services, including motor coaches, limousines, sedans, dance floors, decorative props, lighting, podiums, sound or video equipment, or equipment for catered meals;
(H) does not prepare or serve beverages, meals, or other food products, but may procure catering services on behalf of the entity's clients;
(I) does not provide services for weddings;
(J) does not own or operate a venue at which events or activities for which destination management services are provided occur; and
(K) is not a member of an affiliated group, as that term is defined by Tax Code, §171.0001, (General Definitions), another member of which:
(i) prepares or serves beverages, meals, or other food products; or
(ii) owns or operates a venue described by subparagraph (J) of this paragraph.
(15) Qualified live event promotion company--
(A) A taxable entity that:
(i) receives at least 50% of the entity's annual total revenue from the provision or arrangement for the provision of three or more live event promotion services;
(ii) maintains a permanent nonresidential office from which the live event promotion services are provided or arranged;
(iii) employs 10 or more full-time employees during all or part of the period for which taxable margin is calculated;
(iv) does not provide services for a wedding or carnival; and
(v) is not a movie theater.
(B) For the purposes of this section:
(i) "live event promotion services" means services related to the promotion, coordination, operation, or management of a live entertainment event. The term includes services related to the provision of the staff for the live entertainment event or the scheduling and promotion of an artist performing or entertaining at the live entertainment event;
(ii) "live entertainment event" means an event that occurs on a specific date to which tickets are sold in advance by a third-party vendor and at which: a natural person or a group of natural persons, physically present at the venue, performs for the purpose of entertaining a ticket holder who is present at the event; a traveling circus or animal show performs for the purpose of entertaining a ticket holder who is present at the event; or a historical, museum-quality artifact is on display in an exhibition; and
(iii) "artist" means a natural person or an entity that contracts to perform or entertain at a live entertainment event.
(16) Sales commission--
(A) any form of compensation paid to a person for engaging in an act for which a license is required by Occupations Code, Chapter 1101 (Real Estate Brokers and Sales Agent); or
(B) compensation paid to a sales representative by a principal in an amount that is based on the amount or level of certain orders for or sales of the principal's product and that the principal is required to report on Internal Revenue Service Form 1099-MISC (or would have been reported if the amount had met the Internal Revenue Service minimum reporting requirement).
(C) For purposes of this paragraph:
(i) a "principal" is a person who manufactures, produces, imports, distributes, or acts as an independent agent for the distribution of a product for sale; uses a sales representative to solicit orders for the product; and compensates the sales representative wholly or partly by sales commission.
(ii) A "product" means services, tangible personal property, and intangible property.
(17) Security--The meaning assigned by Internal Revenue Code, §475(c)(2) (Security defined), and includes instruments described by Internal Revenue Code, §475(e)(2)(B), (C), and (D) (Commodity).
(18) Tiered partnership arrangement--An ownership structure in which any of the interests in one taxable entity treated as a partnership or an S corporation for federal income tax purposes (a "lower tier entity") are owned by one or more other taxable entities (an "upper tier entity").
(19) United States government--Any department or ministry of the federal government, including a federal reserve bank. The term does not include a state or local government, a commercial enterprise owned wholly or partly by the United States government, or a local governmental entity or commercial enterprise whose obligations are guaranteed by the United States government.
(20) United States government agency--An instrumentality of the United States government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the United States government. The term includes the Government National Mortgage Association, the Department of Veterans Affairs, the Federal Housing Administration, the Farmers Home Administration, the Export-Import Bank, the Overseas Private Investment Corporation, the Commodity Credit Corporation, the Small Business Administration, and any successor agency.
(21) United States government-sponsored agency--An agency originally established or chartered by the United States government to serve public purposes specified by the United States Congress but whose obligations are not explicitly guaranteed by the full faith and credit of the United States government. The term includes the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Farm Credit System, the Federal Home Loan Bank System, the Student Loan Marketing Association, and any successor agency.
(22) Vaccine--A preparation or suspension of dead, live attenuated, or live fully virulent viruses or bacteria, or of antigenic proteins derived from them, used to prevent, ameliorate, or treat an infectious disease.
(c)
General rules for reporting total revenue.
(1) Variant of form. Any reference to an Internal Revenue Service form includes a variant of the form. For example, a reference to Form 1120 includes Forms 1120-A, 1120-S, and other variants of Form 1120. A reference to an Internal Revenue Service form also includes any subsequent form with a different number or designation that substantially provides the same information as the original form.
(2) Amount reportable. Any reference to an amount reportable as income on a line number on an Internal Revenue Service form is the amount entered to the extent the amount entered complies with federal income tax law and includes the corresponding amount entered on a variant of the form, or a subsequent form, with a different line number to the extent the amount entered complies with federal income tax law.
(3) Federal consolidated group. A taxable entity that is part of a federal consolidated group computes its total revenue as if it had filed a separate return for federal income tax purposes. Information on combined reporting can be found in §3.590 of this title (relating to Margin: Combined Reporting).
(4) Passive entity. A taxable entity shall include its share of net distributive income from a passive entity, but only to the extent the net income of the passive entity was not generated by any other taxable entity.
(5) Treatment of total revenue exclusions for cost of goods sold and compensation.
(A) Any expense excluded from total revenue (e.g., flow-through funds or the cost of uncompensated care allowed under subsection (e) of this section) may not be included in the determination of cost of goods sold (see §3.588 of this title) or the determination of compensation (see §3.589 of this title).
(B) Net distributive income that is subtracted from total revenue may not be included in the determination of compensation.
(6) Ordinary contract for services. Except as provided by subsection (e)(2) of this section, a payment received under an ordinary contract for the provision of services in the ordinary course of business may not be excluded from the calculation of total revenue.
(7) Payment to affiliated group members. If the taxable entity belongs to an affiliated group, the taxable entity may not exclude from the calculation of total revenue any payments described by subsection (e)(1) - (6) of this section that are made to entities that are members of the affiliated group.
(8) Tiered partnership provision. This provision is not mandatory. Subject to the following subparagraphs, a lower tier entity in a tiered partnership arrangement may exclude from total revenue the amount of total revenue reported to an upper tier entity. If a lower tier entity chooses to file under the tiered partnership provision, the lower tier entity may report total revenue to any or all of its upper tier entities. The total revenue reported to an upper tier entity must equal the upper tier entity's ownership percentage of the lower tier entity's entire total revenue.
(A) Reporting requirements. The lower tier entity must submit a report to the comptroller showing the amount of total revenue that each upper tier entity must include with the upper tier entity's own total revenue. Each upper tier entity must submit a report to the comptroller showing the amount of the lower tier entity's total revenue that was passed to the upper tier entity and is included in the total revenue of the upper tier entity.
(B) Nontaxable upper tier entity. This paragraph does not apply to that percentage of the total revenue attributable to an upper tier entity by a lower tier entity if the upper tier entity is not subject to the tax under this chapter. In this case, the lower tier entity cannot report total revenue to the nontaxable upper tier entity and the lower tier entity cannot exclude this total revenue from its franchise tax report.
(C) Eligibility for no tax due and the E-Z Computation. The no tax due thresholds and the E-Z Computation do not apply to an upper or lower tier entity if, before the attribution of any total revenue by a lower tier entity to upper tier entities under this section, the lower tier entity does not meet the criteria. See §3.584(d)(7) of this title (relating to Margin: Reports and Payments).
(D) Not a partnership distribution. Total revenue reported from a lower tier entity to an upper tier entity under the provisions of Tax Code, §171.1015(b) (Reporting for Certain Partnerships in Tiered Partnership Arrangement), is not a distribution from a partnership.
(E) Combined reporting. The tiered partnership provision is not an alternative to combined reporting. Combined reporting is mandatory for taxable entities that meet the ownership and unitary criteria. See §3.590 of this title. Therefore, the tiered partnership provision is not allowed if the lower tier entity is included in a combined group.
(F) Accounting period. If the lower tier entity and an upper tier entity have different accounting periods, the upper tier entity must allocate the revenue reported from the lower tier entity to the accounting period that the upper tier entity's report is based on.
(G) Lower tier entity no tax due. For reports originally due on or after January 1, 2010, if the lower tier entity owes no tax before the attribution of total revenue to the upper tier entities, filing under the tiered partnership provision is not allowed.
(9) Nontaxable revenue. Revenue that Texas cannot tax under the United States Constitution is not included in total revenue.
(10) Federal disregarded entity. A taxable entity that is disregarded for federal income tax purposes computes its total revenue as if it had filed a separate return as a corporation for federal income tax purposes. The federal disregarded entity may, however, choose to combine its revenue, cost of goods sold, compensation and gross revenue with its parent as provided by §3.590(d)(6) of this title. Further information on combined reporting can be found in §3.590 of this title.
(d)
Total revenue. The line items in this subsection refer to line items on the 2006 Internal Revenue Service forms. A reference to a line item on the 2006 Internal Revenue Service forms includes any line item on a subsequent form with a different number or designation that substantially provides the same information as the line item on the 2006 Internal Revenue Service forms. For reports originally due prior to January 1, 2026, total revenue is based on the equivalent line numbers from the corresponding federal return, the amounts of which are computed based on the Internal Revenue Code. For reports originally due on or after January 1, 2026, total revenue is based on the equivalent line numbers from the corresponding federal return.
(1) Corporations. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as a corporation for federal income tax purposes is computed by:
(A) adding:
(i) the amount reportable as income on line 1c, Internal Revenue Service Form 1120;
(ii) the amounts reportable as income on lines 4 through 10, Internal Revenue Service Form 1120; and
(iii) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and
(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:
(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;
(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 (Dividends received from certain foreign corporations by domestic corporations choosing foreign tax credit) or §§951 - 964 (Controlled Foreign Corporations). Subtractions under this clause do not include foreign-derived intangible income (FDII) or global intangible low-taxed income (GILTI), as defined by the Tax Cuts and Jobs Act of 2017, or foreign-derived deduction eligible income (FDDEI) or net controlled foreign corporation tested income (NCTI), as defined by the One Big Beautiful Bill Act of 2025;
(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;
(iv) allowable deductions from Internal Revenue Service Form 1120, Schedule C, to the extent the relating dividend income is included in total revenue. Subtractions under this clause do not include FDII or GILTI deductions, as defined by the Tax Cuts and Jobs Act of 2017, or FDDEI or NCTI deductions, as defined by the One Big Beautiful Bill Act of 2025;
(v) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and
(vi) other amounts authorized by subsection (e) of this section.
(2) S corporations. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as an S corporation for federal income tax purposes is computed by:
(A) adding:
(i) the amount reportable as income on line 1c, Internal Revenue Service Form 1120S;
(ii) the amounts reportable as income on lines 4 and 5, Internal Revenue Service Form 1120S;
(iii) the amounts reportable as income on lines 3a and 4 through 10, Internal Revenue Service Form 1120S, Schedule K;
(iv) the amounts reportable as income on lines 17 and 19, Internal Revenue Service Form 8825; and
(v) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and
(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:
(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;
(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964. Subtractions under this clause do not include FDII or GILTI, as defined by the Tax Cuts and Jobs Act of 2017, or FDDEI or NCTI, as defined by the One Big Beautiful Bill Act of 2025;
(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;
(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and
(v) other amounts authorized by subsection (e) of this section.
(3) Partnerships. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as a partnership for federal income tax purposes is computed by:
(A) adding:
(i) the amount reportable as income on line 1c, Internal Revenue Service Form 1065;
(ii) the amounts reportable as income on lines 4, 6, and 7, Internal Revenue Service Form 1065;
(iii) the amounts reportable as income on lines 3a and 5 through 11, Internal Revenue Service Form 1065, Schedule K;
(iv) the amounts reportable as income on line 17, Internal Revenue Service Form 8825;
(v) the amounts reportable as income on line 11, plus line 2 or line 45, Internal Revenue Service Form 1040, Schedule F; and
(vi) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and
(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:
(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;
(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964. Subtractions under this clause do not include FDII or GILTI, as defined by the Tax Cuts and Jobs Act of 2017, or FDDEI or NCTI, as defined by the One Big Beautiful Bill Act of 2025;
(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;
(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and
(v) other amounts authorized by subsection (e) of this section.
(4) Trusts. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as a trust for federal income tax purposes is computed by:
(A) adding:
(i) the amount reportable as income on lines 1, 2a, 3, 4, 7, and 8 of Internal Revenue Service Form 1041;
(ii) the amount reportable as income on lines 3, 4, 32, and 37 of Internal Revenue Service Form 1040, Schedule E;
(iii) the amounts reportable as income on line 11, plus line 2 or line 45, Internal Revenue Service Form 1040, Schedule F; and
(iv) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and
(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:
(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;
(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964. Subtractions under this clause do not include FDII or GILTI, as defined by the Tax Cuts and Jobs Act of 2017, or FDDEI or NCTI, as defined by the One Big Beautiful Bill Act of 2025;
(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;
(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and
(v) other amounts authorized by subsection (e) of this section.
(5) Single member limited liability company (SMLLC) filing as a sole proprietorship. For the purpose of computing its taxable margin, the total revenue of a taxable entity registered as a single member limited liability company and filing as a sole proprietorship for federal income tax purposes is computed by:
(A) adding:
(i) the amount reportable as income on line 3 of Internal Revenue Service, Form 1040, Schedule C;
(ii) the amount reportable as income on line 17, Internal Revenue Service Form 4797, to the extent that it relates to the (SMLLC);
(iii) ordinary income or loss from partnerships, S corporations, estates and trusts, Internal Revenue Service Form 1040, Schedule E, to the extent that it relates to the (SMLLC);
(iv) the amount reportable as income on line 16 of Internal Revenue Service Form 1040, Schedule D, to the extent that it relates to the (SMLLC);
(v) the amounts reportable as income on lines 3 and 4, Internal Revenue Service Form 1040, Schedule E, to the extent that it relates to the (SMLLC);
(vi) the amounts reportable as income on line 11, plus line 2 or line 45, Internal Revenue Service Form 1040, Schedule F, to the extent that it relates to the (SMLLC);
(vii) the amount reportable as income on line 6 of Internal Revenue Service Form 1040, Schedule C, that has not already been included in this subparagraph; and
(viii) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and
(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:
(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;
(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964. Subtractions under this clause do not include FDII or GILTI, as defined by the Tax Cuts and Jobs Act of 2017, or FDDEI or NCTI, as defined by the One Big Beautiful Bill Act of 2025;
(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;
(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and
(v) other amounts authorized by subsection (e) of this section.
(6) Other taxable entities. For a taxable entity other than a taxable entity treated for federal income tax purposes as a corporation, S corporation, partnership, trust, or single member limited liability company filing as a sole proprietorship, the total revenue shall be an amount determined in a manner substantially equivalent to the amount calculated for the entities listed in this subsection.
(e)
Exclusions from total revenue. Except as otherwise provided in this section and only to the extent included in the calculation of total revenue under subsection (d)(1) - (6) of this section, the following items shall be excluded from total revenue:
(1) Flow-through funds mandated by law or fiduciary duty. Flow-through funds that are mandated by law or fiduciary duty to be distributed to other entities or persons, including taxes collected from a third party by the taxable entity and remitted by the taxable entity to a taxing authority.
(A) Allowed exclusions include, but are not limited to, taxes imposed by law on a third party but collected by the taxable entity and remitted by it to a taxing authority. Examples include, but are not limited to, state sales tax and the Texas hotel occupancy tax.
(B) For excise taxes, only those entities that collect and remit the tax to the taxing authority may exclude the tax from total revenue. Excise taxes include, but are not limited to, motor fuels taxes and tobacco taxes.
(C) Taxes imposed by law on the taxable entity itself are not allowed as flow-through funds and cannot be excluded from total revenue. Examples include, but are not limited to, the Texas mixed beverage gross receipts tax and the Texas franchise tax.
(D) Payments of monetary awards in judgments and administrative orders are flow-through funds mandated by law if the judgments or orders are based on a statutory directive to distribute revenue to another entity or person. An example of a flow-through fund mandated by law is the public performance royalty based on a percentage of licensee gross revenues, which is mandated by a Copyright Royalty Board order pursuant to 17 U.S.C., §112 (Limitation on executive rights: Ephemeral recordings) and §114 (Scope of exclusive rights and sound recordings). Examples of flow-through funds that are not mandated by law are payments of judgments awarding contract or tort damages, agreed payments pursuant to antitrust consent decrees, and agreed payments to obtain permit approvals.
(2) Flow-through funds mandated by contract or subcontract. Flow-through funds that are mandated by contract or subcontract to be distributed to other entities or persons are limited to:
(A) sales commissions, as that term is defined by subsection (b)(16) of this section, to non-employees, including split-fee real estate commissions;
(B) the tax basis as determined under the Internal Revenue Code of securities underwritten; and
(C) subcontracting payments made under a contract or subcontract entered into by the taxable entity to provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, remediation, or repair of improvements on real property or the location of the boundaries of real property. For the purpose of this paragraph, a payment is a subcontracting payment when the following requirements are met:
(i) The payment is made for services, labor, or material that the taxpayer is obligated and compensated by its customer to provide;
(ii) the taxpayer has a contractual obligation to compensate its subcontractor; and
(iii) the connection between the payment and the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of the boundaries of real property is more than tangential. However, the taxpayer's subcontractor is not required to effect a material or physical change to the real property.
(3) Principal repayments. A taxable entity that is a lending institution shall exclude the principal repayment of loans.
(4) Tax basis of securities and loans. A taxable entity shall exclude the tax basis, as determined under the Internal Revenue Code, of securities and loans sold.
(5) Legal services. A taxable entity that provides legal services shall exclude:
(A) the following flow-through funds that are mandated by law, contract, or fiduciary duty to be distributed to the claimant by the claimant's attorney or to other entities or persons on behalf of a claimant by the claimant's attorney:
(i) damages due the claimant;
(ii) funds subject to a lien or other contractual obligation arising out of the representation, other than fees owed to the attorney;
(iii) funds subject to a subrogation interest or other third-party contractual claim; and
(iv) fees paid an attorney in the matter who is not a member, partner, shareholder, or employee of the taxable entity;
(B) reimbursement of the taxable entity's expenses incurred in prosecuting a claimant's matter that are specific to the matter, are reimbursed on a dollar-for-dollar basis, and are not estimated amounts, such as general operating expenses; and
(C) regardless of whether it was included in the calculation of total revenue under subsection (d) of this section, $500 per pro bono services case handled by the attorney, but only if the attorney maintains records of the pro bono services for auditing purposes in accordance with the manner in which those services are reported to the State Bar of Texas.
(6) Pharmacy cooperative or network. A taxable entity that is a pharmacy cooperative shall exclude flow-through funds from rebates from pharmacy wholesalers that are distributed to the pharmacy cooperative's shareholders. A taxable entity that provides a pharmacy network shall exclude reimbursements, pursuant to contractual agreements, for payments to pharmacies in the pharmacy network.
(7) Professional employer organization. A taxable entity that is a professional employer organization shall exclude payments received from a client for wages, payroll taxes on those wages, employee benefits, and workers' compensation benefits for the covered employees of the client. A professional employer organization cannot exclude payments received from a client for payments made to independent contractors assigned to the client and reportable on Internal Revenue Service Form 1099.
(8) Dividends and interest from federal obligations. A taxable entity shall exclude dividends and interest received from federal obligations.
(9) Management company. A taxable entity that is a management company shall exclude reimbursements of specified costs incurred in its conduct of the active trade or business of a managed entity, including wages and cash compensation as determined under Tax Code, §171.1013(a) and (b).
(10) Health care provider. A taxable entity that is a health care provider shall exclude:
(A) the total amount of payments, including co-payments and deductibles from the patient or supplemental insurance, received:
(i) under the Medicaid program, Medicare program, Indigent Health Care and Treatment Act (Health and Safety Code, Chapter 61), and Children's Health Insurance Program (CHIP), including any plans under these programs and capitation awards from the Centers for Medicare & Medicaid Services transferred from another entity in the health care provider's corporate structure;
(ii) for professional services provided in relation to a workers' compensation claim under Labor Code, Title 5 (Texas Workers' Compensation Act);
(iii) for professional services provided to a beneficiary rendered under the TRICARE military health system, including any plans under this program;
(iv) from a third-party agent or administrator for revenue earned under clauses (i) - (iii) of this subparagraph; and
(B) the actual costs, regardless of whether it was included in the calculation of total revenue under subsection (d)(1) - (6) of this section, of uncompensated care provided, but only if the provider maintains records of the uncompensated care for auditing purposes and, if the provider later receives payment for all or part of that care, the provider adjusts the amount excluded for the tax year in which the payment is received.
(11) Health care institution. A health care provider that is a health care institution shall exclude 50% of the exclusion described in paragraph (10) of this subsection.
(12) Federal government and armed forces. A taxable entity shall exclude all revenue received that is directly derived from the operation of a facility that is:
(A) located on property owned or leased by the federal government; and
(B) managed or operated primarily to house members of the armed forces of the United States.
(13) Oil and gas revenue from low-producing wells.
(A) During the dates certified by the comptroller in which the monthly average closing price of West Texas Intermediate crude oil is below $40 per barrel, as recorded on the New York Mercantile Exchange, a taxable entity shall exclude revenue received from the sale of oil produced from an oil well designated by the Railroad Commission of Texas or similar authority of another state whose production averages less than 10 barrels a day over a 90-day period.
(B) During the dates certified by the comptroller in which the average closing price of gas is below $5 per MMBtu, as recorded on the New York Mercantile Exchange, a taxable entity shall exclude revenue received from the sale of gas produced from a gas well designated by the Railroad Commission of Texas or similar authority of another state whose production averages less than 250 mcf a day over a 90-day period.
(14) Qualified destination management company. Effective for reports originally due on or after January 1, 2010, a taxable entity that is a qualified destination management company shall exclude payments made to other entities or persons to provide services, labor, or materials in connection with the provision of destination management services.
(15) Qualified live event promotion company. Effective for reports originally due on or after January 1, 2012, a taxable entity that is a qualified live event promotion company shall exclude payments made to artists in connection with the provision of a live entertainment event or live event promotion services.
(16) Qualified courier and logistics company. Effective for reports originally due on or after January 1, 2012, a taxable entity that is a qualified courier and logistics company shall exclude subcontracting payments made by the taxable entity to nonemployee agents for the performance of delivery services.
(17) Aggregate transportation company. Effective for reports originally due on or after January 1, 2014, a taxable entity that is primarily engaged in the business of transporting aggregates shall exclude subcontracting payments made to nonemployee agents for the performance of delivery services. "Aggregates" means any commonly recognized construction material removed or extracted from the earth, including dimension stone, crushed and broken limestone, crushed and broken granite, other crushed and broken stone, construction sand and gravel, industrial sand, dirt, soil, cementitious material, and caliche.
(18) Barite transportation company. Effective for reports originally due on or after January 1, 2014, a taxable entity that is primarily engaged in the business of transporting barite shall exclude subcontracting payments to nonemployee agents for the performance of transportation services. "Barite" means barium sulfate (BaSO4), a mineral used as a weighing agent in oil and gas exploration.
(19) Landman services company. Effective for reports originally due on or after January 1, 2014, a taxable entity that is primarily engaged in the business of performing landman services shall exclude subcontracting payments made to nonemployees for the performance of landman services.
(20) Vaccine. Effective for reports originally due on or after January 1, 2014, a taxable entity shall exclude the actual cost paid for a vaccine.
(21) Waterway transportation company. Effective for reports originally due on or after January 1, 2014, a taxable entity primarily engaged in the business of transporting goods by waterway that does not subtract cost of goods sold in computing taxable margin shall exclude direct costs of providing transportation services by intrastate or interstate waterways to the same extent that a taxable entity that sells in the ordinary course of business real or tangible personal property would be authorized by Tax Code, §171.1012 (Determination of Cost of Goods Sold), to subtract those costs as costs of goods sold in computing its taxable margin, notwithstanding Tax Code, §171.1012(e)(3).
(22) Agricultural aircraft operation company. Effective for reports originally due on or after January 1, 2014, a taxable entity primarily engaged in the business of providing services as an agricultural aircraft operation, as defined by 14 C.F.R. §137.3 (Definitions), shall exclude the cost of labor, equipment, fuel, and materials used in providing those services.
(23) Motor carrier company. Effective for reports originally due on or after January 1, 2014, a taxable entity that is registered as a motor carrier under Transportation Code, Chapter 643, shall exclude flow-through revenue derived from taxes and fees.
(24) Performing rights society. Effective for payments received on or after June 4, 2019, a taxable entity that is a performing rights society that licenses the public performance of nondramatic musical works on behalf of a copyright owner shall exclude payments made to the public performance rights holder and the copyright owner for whom the taxable entity licenses the public performance.
(25) Qualifying loan or grant proceeds related to COVID-19 relief. Effective for reports originally due on or after January 1, 2021, a taxable entity shall exclude qualifying loan or grant proceeds, as defined under Tax Code, §171.10131 (Provisions Related to Certain Money Received for COVID-19 Relief).
(26) Qualifying grant proceeds related to broadband deployment. Effective for reports originally due on or after January 1, 2023, a taxable entity shall exclude qualifying grant proceeds, as defined under Tax Code, §171.10132 (Provisions Related to Certain Grants Received for Broadband Deployment in Texas).
(f)
Exemptions. Effective June 16, 2021, the following items related to Winter Storm Uri are exempt from the franchise tax and are not included in total revenue:
(1) Gas utilities:
(A) any interest on customer rate relief bonds, as defined by Utilities Code, §104.362;
(B) the sale or purchase of customer rate relief bonds issued under Utilities Code, Subchapter I (Customer Rate Relief Bonds);
(C) revenue derived from services performed in the issuance or transfer of customer rate relief bonds issued under Utilities Code, Subchapter I; and
(D) a gas utility's receipt of customer rate relief charges, as defined under Utilities Code, §104.362 (Definitions);
(2) Electric markets:
(A) the transfer and receipt of default charges, as defined under Utilities Code, §39.602 (Definitions);
(B) transactions involving the transfer and ownership of uplift property, as described by Utilities Code, §39.662 (Property rights); and
(C) the receipt of uplift charges, as defined under Utilities Code, §39.652 (Definitions);
(3) Electric Cooperatives:
(A) transactions involving the transfer and ownership of securitized property, as defined under Utilities Code, §41.152 (Definitions); and
(B) the receipt of securitized charges, as defined under Utilities Code, §41.152.
Source Note: The provisions of this §3.587 adopted
to be effective January 1, 2008, 32 TexReg 10028; amended to be effective
January 1, 2009, 33 TexReg 10503; amended to be effective December
31, 2009, 34 TexReg 9470; amended to be effective September 30, 2012,
37 TexReg 7487; amended to be effective March 1, 2026, 51 TexReg 1162.
Source: official text